Portugal was the second country (after Greece) to ratify the fiscal compact treaty (together with the ESM). The fiscal compact will be implemented under the auspices of the European Court of Justice which will monitor the national rule’s compliance with the treaty. Some key elements of the fiscal treaty are effectively already in force since […]
The Eurozone crisis has been in retreat since the introduction of the European Central Bank’s (ECB) three-year long-term refinancing operations (LTROs) in late December 2011. At the European Council Meeting in early March, journalists who cover the crisis fretted that boredom loomed. The current lull does not indicate that the Eurozone is in the clear, […]
This post is a summary of Fitch’s views drawn from a recent Fitch conference: European Credit Outlook 2011, London January 21, 2011
- Fitch are sanguine about the EZ crisis and expect a muddle through, despite noting substantial risks and not providing convincing explanations why they won’t happen or what will mitigate them.
- In aggregate, banks should be able to transition to new Basel III via retained earnings.
- But banks’ funding costs are at risk from the removal of government support: “Roughly one quarter of developed market EMEA IDRs are at their support floors and are vulnerable to rating downgrades arising in a ‘lower support’ bank resolution regime world”.
- Covered bond programmes are quite sensitive to issuer downgrades.
Portugal’s incumbent President, Anibal Cavaco Silva, was comfortably re-elected on January 23. Cavaco, the candidate of the center-right Social Democrat Party, the largest opposition party, won 53% of the vote, thereby obviating the need for further rounds of voting. While the office of the president enjoys comparatively limited constitutional powers in Portugal, it does carry the authority to dissolve parliament and call fresh elections. The resounding nature of Cavaco’s re-election was a reflection of widespread disillusionment with the serving Socialist Party (PS) minority government, whose presidential candidate received only 19.8% of the vote. This level of voter antipathy also highlights the extent of the government’s vulnerability should Portugal be required to seek external financial assistance from the IMF/EU, as RGE expects will eventually be the case if current borrowing costs persist or rise further.
Portugal’s financing needs can easily be covered by the existing umbrella of official resources, effectively amounting to about €470 billion-520 billion (comprising €255 billion from the AAA-country-backed European Financial Stability Facility (EFSF) or €288 based on 17.7/27=0.65 Irish loan-to-financing ratio + €60 billion from the European Financial Stability Mechanism (EFSM), as well as 50% of the aggregate EFSF/EFSM amount from the IMF), but everybody is well aware that the focus would immediately turn to Spain, for which the existing resources would be insufficient over three years, particularly if the banks’ unsecured short-term and maturing liabilities are included as well.
Though the eurozone’s recovery from recession has been better than we initially envisaged, we see a set of external and domestic pressures—some persistent, some new—as potential threats to 2011 growth. As we discuss in the September update to our 2010 Global Economic Outlook, the standout performance of the core and Northern European economies, particularly Germany, alongside renewed weakness in the periphery is giving rise to a multispeed recovery. This adds a new set of risks—such as the implications of one-size-fits-all monetary policy—to the existing list.
Even as the IMF and the eurozone have virtually finalized an unprecedented three-year financing package of €110 billion for Greece, financial markets remain unimpressed. The common currency continued to plunge this week and long-term government bond yields in Greece and in the periphery countries spiked upward again after a short relief rally before the agreement. The market’s lukewarm reaction to the financing package confirms RGE’s view that a traditional financing package (Plan A), extended at unsustainable interest rates, will not allay solvency fears but rather will lead to a disorderly outcome and contagion. RGE has therefore consistently argued for a preemptive debt restructuring via maturity extension (Plan B) as the preferable solution for Greece. On May 4, Greek authorities confirmed that they contacted the investment bank Lazard for financial advice, but they categorically ruled out debt restructuring as an option under discussion.
This week’s note draws from a new RGE Analysis, “No Greece in America’s Engine,” which was pre-released to RGE Direct Access clients on Monday and is now available to all RGE clients. The following is a brief summary of some of the macro research included in the piece—the full analysis goes into much greater depth and also includes investment strategy recommendations for clients.
United States Roughly one year ago, around the Thanksgiving festivities, the National Bureau of Economic Research (NBER) announced that the U.S. recession started in December 2007. One year later, though the U.S. economy is in recovery mode, retailers are approaching the holiday season—which accounts for slightly less than one fifth of yearly U.S. retail sales—with […]